Are Voting Rights Provisions In Subordination Agreements Enforceable?

In addition to payment subordination, subordination agreements often contain other bells and whistles that enhance the senior creditor's rights. One common provision is an agreement by the subordinated creditor that, if the issuer is a debtor in a bankruptcy case, the senior creditor can vote the claim of the junior creditor on any proposed Chapter 11 plan. If given effect, such a voting provision can give a senior creditor significant power, relative to both the subordinated creditor and other creditors, to support or oppose confirmation of a plan.

For that reason, such voting provisions are controversial and bankruptcy courts are split on the enforceability of private agreements that allow the senior creditor to vote the subordinated creditor's claim. A recent case from the U.S. Bankruptcy Court for the District of Kansas, In re Fencepost Productions, sided with the proposition that such voting provisions are not enforceable. See, In re Fencepost Productions, 629 B.R. 289, 292-95 (Bankr. D. Kan. 2021). Given that courts continue to debate the issue, let's examine some of the salient points in the analysis and perhaps raise a few questions of our own.